Unit 2 MFRD Assignment - Radisson Plc

Unit 2 MFRD Assignment - Radisson Plc

Program

Diploma in Business

Unit Number and Title

Unit 2 Managing Financial Resources And Decisions

QFC Level

Level 4

Introduction

Organisation get adequate level of support from their management as they manage their things in adequate manner and helps in smooth processing. One of the management activities is to manage their financial activities as well as finance. They are highly focused over managing the finance of the organisation as it is the essential element that helps in running their business strategy. They make use of different methods in order to manage finance such as using budgets (for allocation of finance), financial planning (to make adequate use of finance) and many more. They also investment organisational finance in different projects and for this purpose they utilise investment appraisal techniques for evaluating the beneficial investment. In the end of the year they analyse or evaluate their own performance and make comparison with their previous year's performance for this purpose they utilise financial ratio analysis.

Task 1

1.1 Identify the appropriate sources of finance available for the selected business for its operations and assess the implication of different sources. [P1.1 and P1.2, M1]

The appropriate sources of finance available for Radisson Plc get discussed below such as: -

Bank loan: -Radisson Plc opt most easiest source of finance as they took loan from bank by fulfilling required formalities and agreed to pay interest over fixed rate. By getting funds from bank they attain various benefits as they get tax relaxation over the payment of interest, increase in their creditability whereas there are some demerits as failure of payment directly results into bankruptcy, if they fail to pay loan amount their securities get seized by bank (Tarca, et. al., 2013).

Leasing: - Radisson plc contract the lessee and took the required equipment or machinery over lease. The major benefit behind using this option is to make diverse use of the available funds without blocking them with the purchase of capital asset. The disadvantage of this option is Radisson plc didn't become owner of assets and they need to return that asset after completion of time period (Tarca, et. al., 2013).

Equity capital: - Radisson plc issue their share among public and sell out their ownership for the purpose of business expansion. The major benefit is they get huge finance through it but they lose their ownership (Tarca, et. al., 2013).

Bank overdraft: - Radisson plc took overdraft facility for the purpose of supporting their routinely activities. It need to be repaid within short time period else they get fined. The benefit of this option that it didn't stop their payments made to clients (Tarca, et. al., 2013).

Venture capital: - Radisson plc allows venture capitalists in order to make investment in their business expansion plan. The major benefit of this option is they get adequate level of funds from the market but the demerit is else they need to share their ownership or they need to pay adequate interest at effective rate (Tarca, et. al., 2013).

Retained profits: - Radisson plc utilise their own saved funds for their business expansion purpose. The benefit of this option that it didn't create any debt or didn't share ownership with others but it lower down the liquidity of the business organisation (Tarca, et. al., 2013).

Implication of the above discussed sources of finance: -

Sources

Dilution

Legal

Risk

Finance

Bank loan

Bank grant the loan and charge interest over it so no control is diluted.

Legal formalities of bank get imposed in order to get loan.

The rate of risk is high due to its repayment and interest payment.

Huge funds get arranged as per their requirement.

Equity share

Shareholders become the new owners of firm and control get diluted with them.

Lots of governmental legal formalities get imposed with the issue of shares.

There is no risk as the shareholders become owners of company.

Radisson plc get the huge funds to support their expansion plan.

Leasing

Legal agreement is made that include use of assets and payment of interest against usage.

Legal formality in the form of agreement get imposed over lessee and lessor.

There is risk of paying interest on regular intervals.

Radisson plc arrange required machinery or equipment through this option

Bank overdraft

Bank provide adequate facility to Radisson plc and amount get repaid within short time period.

Legal formalities of bank get imposed in order to get overdraft facility.

The rate of risk is high due to its repayment and interest payment.

Effective funds get arranged in order to meet immediate requirement.

Venture capital

It depend over the venture capitalist as they chose option of sharing ownership or getting interests.

Legal agreement is made among them in order to invest money and its utilisation.

Need to repay the amount invested in the business that create high risk.

Huge funds get invested by the third party in the business of Radisson plc to get share of profits.

Retained profit

There is no one else is involved as business utilise their own save funds.

There is no legal implications are there.

There is no such risk is there as they make use of their own funds.

Huge funds get arranged by themselves only.

1.2. Evaluate the appropriate sources of finance for the expansion plan of the above company. [P1.3, D1]

There are four sources adopted by the Radisson plc in order to support their business expansion plan such as: -

Retained profits: - Radisson plc attaining adequate amount of retained profits that get utilised by them in their expansion plan. They get benefited with it as it didn't create any debt over them but it decreases the ratio of their liquid funds (Davies & Crawford, 2011).

Leasing:- Radisson plc took the capital nature equipment or any other asset in the form of lease as with the help of it they utilise their available funds in diverse areas. They make diversified use of their funds but they can't get ownership over the lease equipments (Davies & Crawford, 2011).

Bank loan: - Radisson plc also took loan from bank in order to support their business expansion plan. They benefit of choosing this option is that it increases their overall creditability but in case of failure in repayment it results in bankruptcy (Davies & Crawford, 2011).

Equity share capital: - Radisson plc issue their shares in order to get the funds from the public. With this effect they lose their ownership as shareholders become owners of the firm but they get huge capital in order to process their business expansion plan (Davies & Crawford, 2011).

Task 2

The cost of funding is of three kinds that get discussed below such as: -

Opportunity cost: - This cost type is associated with the share of retained profits as Radisson Plc utilise these funds for their business expansion purpose. Instead of this they also utilise this amount and enjoy better rate of returns (Venezia, et. al., 2012).

Cost of debt financing: - Cost which is associated with the bank loan in the form of interest is referred as cost of debt. Radisson plc also took lease option in order to arrange desired equipments.

Cost of debt = (1 - tax rate)

or Kd = (1 - T)

Cost of equity financing: - Radisson plc make issue of share capital and in order to satisfy their shareholder they share profits with them by paying dividend to them. Payment of dividend fall under cost of equity financing (Venezia, et. al., 2012).

Financial planning: -It is that planning process that get utilised for the purpose of making adequate usage as well as estimations related to the finance. With the use of it Radisson Plc become effectively capable to meet out their short term as well as long term goals in effective manner. Financial management are made with the use of different set of information that make inclusion of budgets, ratio analysis, cash flow statement and other reports. Radisson Plc made three types of financial planning like short, medium and long term (Law, 2010). Their short term financial planning include working capital needs, medium term planning include assets replacement, research and development program whereas long term planning include business expansion plans and many more.

Financial planning importance is discussed as below: -

It helps in estimating the requirement of the finance in the near future.

It encourage saving habits

It make use of available funds for achieving their set organisational goals.

Build adequate control over the usage of the available finance (Law, 2010).

For financial decision making the information required get segregated into three types of information such as: -

Strategic information: - Radisson plc management make use of information for making strategies to meet out their set objectives. They access the information internally as well as externally and summary get utilised by top level management to prepare strategies. They majorly focused over their long term objectives (Bierman, 2010).

Tactical information: - Middle level management of Radisson Plc make use of this information for the purpose of following the strategies prepared by their upper level management in order to support their business activities. Middle level management analyse the information gathered from internal as well as external sources in order to process their activities as well as monitor them (Bierman, 2010).

Operational information: - Lower level management of Radisson Plc make use of this information in order to process all the activities according to the plan for getting the desired objectives. All activities get followed accordingly and controlled in effective manner through this process and these reports get prepared significantly (Bierman, 2010).

2.2. Explain the impact of suggested financing option on the financial statement. [P2.4]

The impact of suggested financing option over the financial statement of Radisson Plc is discussed below such as: -

Statement of comprehensive income: -(decrease in revenues as interest and dividend get paid out of revenues earned). Radisson Plc raise the funds with an adequate balance of debt and equity funds due to which they need to pay dividend over equity capital and interest over their debt funds. The overall share of revenues get decreased due to these additional expenditure as they need to pay them on regular basis (Droms, 2015).

Statement of financial position: (increase the balance of their assets as well as liabilities) Radisson plc arrange the funds which increases their bank balance in effective manner that increases their current assets balance. With the same effect there is adequate increase in their long term liability as well as equity capital because they arrange funds in the form of debt and equity (Droms, 2015).

Statement of cash flows: - (adequate inflow takes place in the form of arranging funds and outflow in the form of paying interest and dividend amount) With the help of the financing activities there is huge inflow of liquid funds takes place whereas with the help of operational and financing activities adequate out flow of funds takes place (Droms, 2015).

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Task 3

3.1 Analyse the importance of budgets for variation and make appropriate decisions for Radisson Plc. [P3.1]

Budget: - It is the method for successful implementation of the organisational strategies. It is the effective report that get prepared in order to allocate the resources as well as set adequate path for achieving set objectives. Different department of Radisson Plc prepare different budgets like cash budget, purchase budget, sales budget, master budget and many more (Fields, 2011).

Importance of preparing budgets: -

Effective tool for systematic process of activities

Effective enough in allocating and controlling the available resources.

It get utilise for actual performance evaluation and also helps in taking corrective actions to improve overall performance.

It enhance the decision making process of organisation (Fields, 2011).

Benefits enjoy by the Radisson Plc by preparing budgets such as: -

resources get allocated and utilised in effective manner

it reduces the chances of having losses

it put adequate control over the usage of the available funds

it helps in forecasting and estimating the requirements of the resources

It helps in monitoring the activities in order to attain the set objectives (Fields, 2011).

3.2 Explain how you would calculate unit cost and make pricing decisions based on appropriate information at the Radisson Plc. [P3.2]

Unit cost: - The share of cost incurred by the marketing management to produce one unit of specific product is termed as unit cost. For getting unit cost all costs get included whether it is variable or fixed along with all direct costs (Cleary & Quinn, 2016).

Pricing: - It is the sum of cost and the profit margin and get paid by the immediate customers in order to purchase the product.

Cost and pricing having adequate relationship between them as higher prices are not preferred by the customers whereas lower prices are not preferred by the organisation because they fail to recover their incurred cost with the sale of their product. Radisson plc. pricing decisions get included by their competitors, customers and other elements. There are number of pricing methods are available like cost plus pricing, skimming pricing, penetration pricing and many more (Cleary & Quinn, 2016). Radisson plc make use of the cost plus pricing method in order to set their prices as this method helps in adding adequate share of profit margin over it before finalising selling price for their customers (Cleary & Quinn, 2016).

3.3 Assess the viability of the expansion project using investment appraisal techniques such as the NPV.. [P3.3]

Net present value: - This investment appraisal technique is utilised for the purpose of knowing the profitability of the respective investment or project. Cash inflows get discounted in order to get the present value of cash inflows which utilised further for evaluating profitability by deducting them from initial investment (Brown, et. al., 2011).

Payback period: -This investment appraisal technique is utilised for purpose of evaluating the risk associated with the investment. Low payback period shows that project is less risky and vice-versa (Brown, et. al., 2011).

For example: - NPV and PBP calculations

Initial investment = £46,000

Life period = 4 years

Scrap value = £4000 (for both projects)

Depreciation charged every year = (£46,000 - £4,000)/4 = £10,500

Project A's cash inflows:

Years

Project A (I)

Depreciation (II)

Net cash inflow (I+II)

1

£6,500

£10,500

£17,000

2

£3,500

£10,500

£14,000

3

£13,500

£10,500

£24,000

4

(£1,500)

£10,500

£9,000

Project B's cash inflows:

Years

Project A (I)

Depreciation (II)

Net cash inflow (I+II)

1

£4,500

£10,500

£15,000

2

£2,500

£10,500

£13,000

3

£4,500

£10,500

£15,000

4

£14,500

£10,500

£25,000

Net present value calculation: -

Project A: -

Heads

Cash inflow

10% Dis. rate

Discounted cash inflow

Initial investment

(£46,000)

1

(£46,000)

Year 1

£17,000

0.909

£15,453

Year 2

£14,000

0.826

£11,564

Year 3

£24,000

0.751

£18,024

Year 4

£9,000

0.683

£6,147

Year 4

£4,000

0.683

£2,732

Net present value

£7,920

Project B: -

Heads

Cash inflow

10% Dis. rate

Discounted cash inflow

Initial investment

(£46,000)

1

(£46,000)

Year 1

£15,000

0.909

£13,635

Year 2

£13,000

0.826

£10,738

Year 3

£15,000

0.751

£11,265

Year 4

£25,000

0.683

£17,075

Year 4

£4,000

0.683

£2,732

Net present value

£9,445

Calculation of Payback period is as follows: -

Project A:

2 + [(46,000 - 31,000) / 23,000]

2 + 0.65

2.65 years

Project B:

3 + [(46,000 - 43,0000)/ 25,000]

3 + 0.12

3.12 years

Outcomes: -

Heads

Project A

Project B

NPV

£7,920

£9,445

PBP

2.65 years

3.12 years

Interpretation

The results clearly shows that Project B is taking so much time in order to recover the invested money but it also yields much higher profits as compare to the project A. On the basis of this information Project B is highly preferred over Project A for investment purpose.

Task 4

Radisson plc prepare below accounts in order to record their routinely transactions such as: -

Statement of comprehensive income: It is the foremost account prepared by them as with the help of they get to know about their profit earning capacity or profitability. Because they record transactions related to their expenditure as well as income and compare them in order to realise profit or loss for that period (Fisher, et. al., 2016).

Statement of comprehensive Income

Net income or (Net Loss) = Net revenues - Net expenditures

Statement of cash flow: - It is the second financial statement prepared by them as it helps in knowing the liquidity position as well as controlling the usage of liquid funds. Under this statement they record all activities related to their cash and cash equivalents. Radisson plc segregate their cash and cash equivalents transactions into three activities and record them accordingly as it helps in getting better information related to their liquid fund utilisation (Fisher, et. al., 2016).

Statement of cash flow

Opening balance of cash and cash equivalents

Add: - Net cash flow from operating activities

Add: - Net cash flow from investing activities

Add: - Net cash flow from financing activities

Net balance of cash and cash equivalents

Statement of Financial position: - It is the most important financial statement for Radisson plc as it helps in knowing their financial position. For this purpose they record all their assets, liabilities and equity capital under this statement only. They follow the IFRS guidelines in order to prepare their financial statement as they helps in rendering detailed information related to their business (Fisher, et. al., 2016).

Statement of financial statements

Current assets

Fixed assets

Total assets

Less: Current liabilities

Less: Long term liabilities

Net assets

Equity capital4

4.2 Select two different types of companies (one could be Radisson Plc) and compare the formats of financial statements. [P4.2]

For the purpose of the comparing the formats of financial statements effective comparison is made between Radisson Plc and ABC & brothers such as: -

Format examples: -

Financial statement of Radisson Plc: -

Statement of financial position: -

Statement of comprehensive income: -

Cash flow statement

Balance sheet of ABC and Brothers:

Profit and loss account: -

Comparison among Radisson Plc and ABC & Brothers

Base of difference

Radisson Plc

ABC & Brothers

Ownership

There are shareholders that own the company.

There are no shareholders and business owned by single person.

Decision making

Board of Directors are appoint to make decisions.

Owner took all the business related decisions.

Statement of comprehensive statement

As a company they need to follow all the set guidelines of IFRS while preparing this statement. It provide easy and understandable information to the users related to their profitability.

They follow dual sided format for preparing this statement as their motive to measure the profit or loss amount they earned through their activities.

Statement of cash flow

They follow the IFRS guidelines as by doing they become capable enough to make detailed record of liquidity usage and also help them in controlling the usage of liquid funds.

They didn't prepare this statement as there are no such stakeholders are there that demand for liquidity information.

Statement of financial position

Management follow the set IFRS guidelines in order to prepare this statement as with the use of it they provide detailed information and also evaluate their financial position.

They prepare balance sheet for the purpose of maintaining a record of liabilities as well as assets.

4.3 Interpret the financial statements using appropriate ratios of a public limited company and compare with those of another company. [P4.3]

Ratio calculation of Radisson Plc and Sunrise Plc. is made in the below table: -

Ratio analysis: -

a.) Gross profit: - The ratio that helps in knowing the ability of getting revenue through sales.

Radisson Plc.

42.51%

Sunrise Plc.

44.89%

Interpretation

Sunrise plc. is bit more efficient as compare to Radisson Plc. in earning revenues with the help of sales.

b.) Net profit: -The ratio that helps in knowing the capability of reducing administration expenditure and getting net profit for the specific period of time.

Radisson Plc.

2.37%

Sunrise Plc.

3.64%

Interpretation

Sunrise Plc. is more capable as compare to the Radisson plc. as they are efficiently lowering their administration expenditure and earn adequate net profit for a specific period of time.

c.) Current assets: -The ratio that helps in knowing the availability of liquid funds to meet out their current liabilities.

Radisson Plc.

1.8

Sunrise Plc.

1.92

Interpretation

Sunrise Plc is having better situation as compare to Radisson Plc as they are more efficient in order to meet out their current liabilities.

d.) Quick assets: -The ratio that helps in knowing the liquidity position of the organisation. For this purpose inventory and prepaid expenses get removed from the current assets.

Radisson Plc.

0.53

Sunrise Plc.

0.62

Interpretation

Sunrise Plc is showing better situation as compare to the Radisson plc. as their liquidity position is much stronger as compare to them. Both are not meeting the minimum requirement.

e.) Receivables turnover: -The ratio that helps in knowing the capability of the organisation to collect their debts from the market that raised through credit sales.

Radisson Plc.

4.94 or 5

Sunrise Plc.

4.91 or 5

Interpretation

Both of the organisations are showing similar capabilities in order to collect their debt funds from the marketing principle.

f.) Inventory turnover: -The ratio that helps in knowing the capacity of the organisation to sold out their inventories within a year.

f.) Inventory turnover:

The ratio that helps in knowing the capacity of the organisation to sold out their inventories within a year.

f.) Inventory turnover:

The ratio that helps in knowing the capacity of the organisation to sold out their inventories within a year.

f.) Inventory turnover:

The ratio that helps in knowing the capacity of the organisation to sold out their inventories within a year.

Final interpretation: Sunrise Plc is much efficient as compare to the Radisson Plc as they attain higher profitability as well as liquidity ration as compare to Radisson plc. There is effective need of improvement for Radisson plc in order to become competitive in their respective market (Park, et. al., 2014).

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Conclusion

In the end it get concluded that Radisson Plc make use of the adequate balance of the debt and equity to raise their required share of finance. The cost associated with the sources of finance render various benefits in the form of the tax reduction and also increases the expenditure in the form of paying taxes. Radisson Plc need to share their information with their associated shareholders as they require their information to make effective decision making. They follows financial planning and budgeting in order to make optimum utilisation of their overall resources in effective manner and for optimum utilisation of their finance they evaluate available projects with the help of NPV and PBP calculation. They evaluate their performance with Sunshine Plc with the use of the ratio analysis.